Using Housing Wealth As A Buffer

USING HOUSING WEALTH AS A BUFFER TO RETIREMENT INCOME FOR SENIORS

By Don Graves, a PMC-LLC Coach

“There are more and more people who are looking at this strategically,” said Don Graves, president of the Housing Wealth Institute, Financial Advisor Coach at Practice Management Consultants, LLC, and author of “HousingWealth: An Advisor’s Guide to Reverse Mortgages.”

Many older Americans worry about outliving their savings and those fears have been magnified by recent spikes in inflation eating away at retirees’ nest eggs. The consumer price index increased by 0.8 percent in April from March and surged 4.2 percent from the previous year, the biggest jump since September 2008. As retirees weigh options to preserve purchasing power, financial experts say adding a reverse mortgage to a retirement plan may offer inflation protection.

How A Reverse Mortgage Works

Reverse mortgages — also known as home equity conversion mortgages, or HECMs — offer seniors aged 62 or older the chance to borrow money from their home’s equity. These fixed- or variable-rate loans are designed for older Americans who plan to stay in their single-family home. The variable-rate option offers a line of credit, with no obligation to withdraw money, and the unused balance may continue to grow over time. The fixed-rate version does not offer the same benefit, making it less useful in fighting inflation.

 The old adage was to wait until you run out of money and then do a reverse mortgage. That is absolutely not the way it is being used right now. Typically, older retirees may borrow a higher amount of equity.

 For example, with a three percent expected rate, a 62-year-old homeowner may borrow about 52 percent of their home’s value. The percentage rises to nearly 61 percent at age 75. Variable rates may range from 2.5 percent to four percent right now, depending on short-term variable interest, often tied to U.S. Treasuries. For the line of credit, heirs may pay off the loan once the borrower dies, allowing them to keep or sell the property.

Reverse Mortgage for Inflation Protection

Typically, retirees spend down their investment portfolios while preserving home equity. “But research suggests making a reverse mortgage part of a retirement plan may offer an unexpected benefit,” Pfau said. “The bigger impact is you’re reducing pressure on the portfolio in retirement,” he said.

Research shows that a reverse mortgage may offer some retirees more money to spend while giving their portfolios more of a chance to grow.

Downsides of Reverse Mortgages

One of the biggest downsides of a reverse mortgage may be the cost. Retirees pay two percent of the home’s appraised value for mortgage insurance premiums upfront, plus 0.5 percent of the outstanding balance every year for the life of the loan. The origination fee is two percent of the first $200,000 of value and one percent for anything above that, up to $6,000. Third-party charges, such as the appraisal, title search, inspection, and other fees are typically one percent of the home’s value.